Perfect storm looms for east coast housing: AMP Capital’s Shane Oliver

AMP Capital’s Shane Oliver has cut his forecasts for Sydney and Melbourne housing prices and warned of a “perfect storm”.

Aerial view of Melbourne city CBD high-rise towers from Port Melbourne and Southbank above residential suburb house roofs and local streets, roads, cars and parks.

AMP Capital chief economist Shane Oliver has cut his forecasts for Sydney and Melbourne housing prices and warned property investors to be wary of a looming “perfect storm”.

Dwelling prices in the NSW and Victorian capitals are likely to fall about 20 per cent from peak to trough as credit conditions tighten and supply rises, he wrote in a note to clients, adding this would take prices back to first-half 2015 levels.

“A negative feedback loop from falling prices risks developing,” Dr Oliver wrote.

“Other cities will perform better having not seen the boom of the last few years.

“Property investors should remain wary of Sydney and Melbourne for now and focus on higher yielding markets.”

The warning comes as national dwelling prices have been falling for the last 12 months and are now down 2.7 per cent amid a regulatory crackdown on lending to investors and riskier borrowers, as well as more scrutiny of owner-occupiers’ expenses and debt-to-income ratios.

Prices in Sydney have fallen 6.1 per cent over the past year while Melbourne is 3.4 per cent lower according to property researcher CoreLogic.

Dr Oliver had previously been predicting top to bottom falls in Sydney and Melbourne of 15 per cent — or declines of about 5 per cent per year until 2020.

But he has now revised his outlook, warning of the tight credit environment, reduced foreign demand, rising unit supply, out of cycle bank mortgage rate rises and possible changes to negative gearing and capital gains tax breaks if there is a change of government.

“On their own some of these are not significant, but together they risk creating a perfect storm for the property market,” he wrote.

“The risks are starting to skew to the downside — particularly around tighter credit and falling capital growth expectations made worse by fears of a change in tax arrangements.”

Auction clearance rates in recent weeks are running around levels consistent with annual price declines of 7 to 8 per cent, he said.

Meanwhile, Perth and Darwin are bottoming out while the other capitals look set to perform better, he said, tipping national average prices to fall nearly 10 per cent out to 2020 — a downgrade from his previous 5 per cent forecast.

He emphasised that a crash was unlikely in the absence of much higher interest rates or unemployment — neither of which are expected — or a collapse in immigration and continued high construction for several years which is unlikely as building approvals are falling.

Strong population growth is driving strong housing demand, while despite talk of mortgage stress a significant number of households are ahead on their repayments, he said.

Even so, the risk of a crash “cannot be ignored” given the danger that banks may become too tight with credit and investors exit the market, he said.

The housing downturn will affect the broader economy through negative wealth effects on consumer spending and less demand for household goods, but over the very long term there is still a role of residential property in investors’ portfolios, he said.